Why getting a mortgage can be awkward if you’re self-employed… and what to do about it.
Being your own boss can be great, so it’s no surprise that nearly 5 million people in the UK are self-employed.
Self-employment can give you added flexibility, allow you to work from home or pick and choose your hours. Most entrepreneurs start as self-employed and many people also use self-employment to turn a hobby or a passion into an income, maybe conscious of the old saying that if you find a job you love you’ll never work a day in your life.
Other people turn to self-employment out of necessity, maybe due to redundancy and a lack of other opportunities. Whatever the reason you’ve decided to work for yourself, when it comes to applying for a mortgage your self-employed status could start to prove problematic.
We’ve consulted specialist self-employment mortgage brokers Simply Lending Solutions to outline some of the problems you may face, as well as suggesting possible solutions.
Flexibility isn’t always an advantage
While you’ll always have to ensure that you earn a living, being your own boss does mean that you can have more choice of when to work than traditional employees. However, it also means that your hours aren’t guaranteed, leading to the amount of money you have coming in fluctuating over time.
It’s this unpredictability of income that can make mortgage lenders nervous. If you are working for an employer your income is more or less guaranteed – excluding unforeseen circumstances.
As lenders use income to calculate both the amount they’re prepared to lend you and your ability to repay your mortgage, a changing level of income may mean they err on the side of caution. They may only agree to lend a small amount or refuse a mortgage completely if they’re not convinced of your ability to meet your mortgage repayments.
Where’s your next job coming from?
Even if you have the benefit of having had a fairly stable income over the past few years, your self-employed status doesn’t give you the same security of future income as being on a permanent employment contract.
Again, lenders may have concerns that your future income is not certain, making the possibility of defaulting on your mortgage more likely.
As well as consistency of income, and the security of a contract, employees have another advantage over the self-employed. Payslips. Even if your income is stable and you have future work in place can you prove it?
Employees can easily provide lenders with copies of payslips and employment contracts to verify their income, but this isn’t as straightforward for self-employed individuals.
Did you realise you were self-employed?
We don’t mean to be facetious but in the UK the question of who is self-employed is open to interpretation. This is particularly true when it comes to tax and employment law, as can be seen from recent court cases involving ‘self-employed’ workers seeking to be recognised as employees.
As far as mortgage lenders are concerned if you’re responsible for sorting out your own tax and national insurance contributions, they’ll generally consider you to be self-employed.
Some lenders may also consider your mortgage application as an application from a self-employed person even if you are a company shareholder. The decision to do this will rest on factors such as what percentage shareholding you have and what proportion of your income you draw from the company.
So what can you do?
There are a few steps that you can take if you are thinking about applying for a mortgage
1. Keep your accounts up to date
2. Get more proof from HMRC
SA302s are a statement of your last 4 years tax calculation available to print directly from the HMRC website once you’ve completed your self-assessment tax return. Lenders will often request these from you as evidence of your income.
3. Keep thing simple
Don’t be tempted to complicate matters by, for example, changing your business structure. You may want to convert from a sole trader to a limited company structure, but the time to do that is not midway through a mortgage application.
4. Don’t do anything stupid!
Certain behaviours act as red flags to lenders. Something like taking out a payday loan may not seem a big deal to you, particularly if you have the means to pay it off quickly, but many mortgage lenders will be cautious if they see this sort of behaviour on your credit record.
5. Call in the professionals
Getting a chartered or certified accountant to do your books may help to reassure prospective lenders about their accuracy. Indeed, some of them will insist that they are signed off by a chartered accountant.
Speaking to a professional mortgage broker who deals regularly with self-employed mortgage applications (many high street brokers don’t) will help significantly. It gives you the opportunity to talk through your individual circumstances with someone who has access to the most up-to-date information regarding lenders’ criteria. The benefit of this is that they’ll understand which lender is most likely to treat your application circumstances sympathetically, thus improving your chances of finding a suitable mortgage deal.
Whatever the circumstances of your self-employment, there’s no reason why they should prevent you from finding a competitive mortgage deal, and buying your dream home.